What it costs to get out of a commercial mortgage early
The clause nobody reads at commitment is the clause that decides what you can do three years later.
The short answer
Commercial mortgages are frequently closed. Many cannot be prepaid at any price for part or all of the term, and where prepayment is allowed the charge is usually calculated to make the lender whole on the interest it expected, not on a three month interest formula.
| Structure | What it means | What it costs you |
|---|---|---|
| Fully closed | No prepayment permitted for a stated period, at any price | You cannot refinance or sell free of the mortgage until it opens |
| Yield maintenance | You compensate the lender for the interest it would have earned to maturity | The largest of the structures, and it rises as rates fall |
| Declining schedule | A percentage of the balance that steps down each year of the term | Predictable, and you can plan around it |
| Open with notice | Prepayment allowed on notice, sometimes with a small charge | The most flexible, and it is priced into the rate |
This is negotiated at commitment, not at payout
It is the single most useful point on this page. The prepayment clause is set when you sign the commitment. By the time you want out, it is not negotiable, because the lender already has what it bargained for and you are the party who needs something.
Borrowers routinely optimise the rate and ignore the clause. The rate is easy to compare across term sheets and the exit terms sit in a paragraph nobody reads aloud. Then three years later an opportunity arrives, a sale, a refinance to fund a purchase, a chance to restructure, and the clause turns out to be what governs whether the opportunity can be acted on at all.
A slightly higher rate with an exit you can afford is often the better loan. We put the clauses side by side with the rates when we compare term sheets, so the choice is made with both numbers visible.
Yield maintenance, explained without the formula
The lender priced your loan expecting a stream of interest running to maturity. When you pay out early, that stream stops, and the lender has to put the money back to work in whatever the market offers today. Yield maintenance asks you to make up the difference between what it expected to earn from you and what it can now earn on the returned funds.
The consequence follows directly. The charge grows as rates fall, because a bigger gap opens between the loan you signed and what the money can earn today. That is exactly the moment most borrowers want to refinance, which is why yield maintenance so often lands as an unpleasant surprise. It is the mechanism working as designed rather than a criticism of it, and understanding that is what lets you plan around it.
Where a penalty is worth paying
A prepayment charge is a cost, not a verdict. It is worth paying when pulling equity out funds a purchase that earns more than the charge costs, when you are selling into a strong bid that will not wait, or when escaping a loan whose maturity sits at a bad moment is worth more than staying put.
The arithmetic is a straight comparison, and we will run it with you. Start by sizing what the property supports today on the commercial mortgage calculator, then read how an equity take out is structured on the commercial refinance and equity take out page.
Insured and securitised loans are their own case
A CMHC insured mortgage carries the prepayment terms of the insured product rather than terms you negotiated freely with the lender, so read them before you sign. See CMHC insured commercial financing for how those loans work.
A loan that has been securitised may require defeasance rather than a cash payment, meaning the loan is not paid out at all but is instead substituted with other security. It is a legal and structural exercise handled by specialists, not a cheque you write at closing.
Prepayment questions.
Thinking about an early exit?
Send the commitment and the current statement. We will read the clause and tell you what the exit costs against what it buys.